12/15/2009 @ 12:20PM

From The Grave, Tax Lawyer To Rich Beats IRS Again

Burton W. Kanter was a noted Chicago tax lawyer who counted the billionaire Pritzker family as clients and for years famously paid no federal income taxes of his own. He’s been dead for eight years, but Kanter’s heirs are continuing his grand tradition of beating the Internal Revenue Service.

A Chicago federal appeals court this month held that Kanter’s estate doesn’t owe the Internal Revenue Service nearly $40 million in taxes, interest and penalties on income dating back decades to Kanter’s years as a high-profile crafter of tax planning strategies and tax shelters for the wealthy.

The ruling came four years after the family won a U.S. Supreme Court ruling that humiliatingly rebuked the U.S. Tax Court for covering up a special trial judge’s report favorable to Kanter and for not following its own rules. The ruling was also a put-down of the IRS, which had supported the Tax Court policy of secrecy and had been chasing Kanter assets for decades.

“We’re thrilled; this is a great victory,” said Joshua Kanter, who as executor of his father’s estate led the battle against the IRS. “This is about the fifth time we’ve won the case.”

The unanimous ruling by the Court of Appeals for the 7th Circuit held for the IRS on minor issues. If the ruling is not appealed, Robert E. McKenzie, one of several lawyers for the Kanters, figures the Kanter estate will owe $3 million or less. That’s probably less than the interest the Kanters have collected in the meantime on the tax payments they won’t have to make.

During his lifetime, Kanter was one of the country’s leading tax lawyers and senior editor of the Journal of Taxation. Armed with a University of Chicago law degree, he crafted tax-saving strategies for Hollywood producers and mega-wealthy families. After patriarch A.N. Pritzker died in 1986, heirs of his Chicago-based family paid $9 million in taxes rather than the $150 million the IRS sought. There are now 11 Pritzkers on the Forbes list of the 400 richest Americans.

But Kanter himself drew plenty of IRS scrutiny. In the 1970s he was indicted on–and acquitted of–tax-evasion charges involving trusts held at a bank in the Bahamas. “Clearly, I’ve been a target for a long time,” he told a Chicago newspaper in 1999, two years before he died of cancer at age 71. “I don’t see any likelihood of that changing.”

One court opinion said that the tax returns of Kanter and his wife, Naomi, now also deceased, were audited every year since 1961. Other filings say they filed tax returns from 1978 to 1989 listing a negative income every single year. It probably didn’t assuage IRS suspicions that news reports said he helped finance Hollywood movies, collected fine art and even was part of an unsuccessful effort to buy a pro football team.

The events leading to this month’s ruling started in the 1970s and involved messy allegations of kickbacks. The IRS later charged that Kanter and two associates, Claude Ballard and Robert Lisle, received payments for arranging business opportunities for others but fraudulently routed those payments through various entities and trusts to avoid payment of personal income taxes. No criminal charges were ever brought.

When the matter first reached the Tax Court in 1994, it was referred to a special trial judge. At the Tax Court, special trial judges are hearing officers who take evidence but don’t render final decisions on their own. Five years later, the Tax Court issued an opinion finding Kanter and his two associates liable for civil fraud penalties. The opinion said the special trial judge had written a 303-page report that had been “adopted.” However, the 303-pager report itself was not made public.

Then two Tax Court judges quietly told one of Kanter’s lawyers the Tax Court opinion was false; the special trial judge’s report actually had cleared Kanter of fraud and perhaps other issues as well. The Kanter side demanded release of the report, saying that was required by the Tax Court’s own rules and that factual conclusions were to be given “due regard,” meaning there had to be a good reason for overturning the report’s factual findings.

A defensive Tax Court refused, and several appeals courts affirmed. But not the U.S. Supreme Court. “The Tax Court, like all other decision-making tribunals, is obliged to follow its own rules,” Justice Ruth Bader Ginsburg held for a 7-2 majority in 2005. “The Tax Court’s practice of not disclosing the special trial judge’s original report, and of obscuring the Tax Court judge’s mode of reviewing that report, impedes fully informed appellate review of the Tax Court’s decision.” She criticized the “Tax Court’s arbitrary construction of its own rules,” and ordered the special trial judge’s report released.

Still, the IRS continued pursuing its case against the three, winning new Tax Court rulings by a different judge. Lawyers for Ballard and Lisle obtained reversals by federal appeals courts in New Orleans and Atlanta. This month’s ruling on Kanter’s appeal makes the IRS zero-for-three.

In Kanter’s case, the three-judge panel held that the original special trial judge’s report was entitled to “deferential review,” especially on its assessment of the credibility of witnesses and its key finding of “no underpayment of taxes.” The 32-page ruling also added, “The case has taken a yo-yo path through our judicial system, from the Tax Court to the Supreme Court and back again.”

And it’s not over yet. The Kanter estate is in Miami federal court fighting an IRS lien on the $165,000 proceeds from the sale of a condo once owned by Naomi Kanter.